Governments got through the Covid-19 crisis by using budgetary tools that would, in normal times, undermine the ‘credibility’ of public financial management, according to one of the authors of a new report.
The conclusion comes following a report from the Public Expenditure and Financial Accountability (PEFA) programme – a body set up by the IMF, the European Commission and the World Bank alongside the governments of the UK, France, Germany, Norway and Switzerland. Global Trends in Public Financial Management Performance looks back at the performance of 77 countries during 2020, the first year of Covid-19.
Governments turned to financial management tools that might be frowned upon at any other time
The report finds many governments increased their spending well above their budgeted figures to cope with the crisis, but they also turned to financial management tools that might be frowned upon at any other time. These include supplementary budgets, reallocation of funds from one budget item to those intended for crisis response, extra budgetary funds and contingency funds.
Reflecting on the findings, Richard Sutherland, a member of the PEFA secretariat, says: ‘These are not necessarily new tools; they’re just tools that allow for budget responsibility and often not seen as good, per se, in normal times because they erode the credibility of budgets.’
However, he adds: ‘Under these stressful times they are often the saviour of governments trying to respond to crises.’
New priorities
PEFA’s report looks at public financial management (PFM) broadly, but also specifically at what happened to budgeting during Covid. The major finding is that governments had to become more flexible in the way they handled public finances – hence the use of the four tools.
The average deviation from a programmed budget in 2020 was 54%, the largest in 15 years
Many countries deviated from their initial budgets for the year. The average deviation from a programmed budget in 2020 was found to be 54%, the largest in 15 years. A hefty 71% of the countries reviewed reported a budget deviation of 5% or more (the materiality level). As the PEFA report notes, Covid ‘significantly altered priorities’.
‘We understand that there are deviations,’ says Sutherland, ‘but it’s the magnitude of the deviations that was quite surprising.’ He adds: ‘We saw that the crisis had a real tangible impact on the ability of governments to maintain their planned expenses throughout the year.’
Preparation and planning
According to Sutherland, there are a number of lessons to be drawn from the examination of 2020. Those boil down to preparation and planning. Robust financial management systems were revealed to be of critical importance, as well as having mechanisms in place, before a crisis, for the ‘flexible reprioritisation’ of funds.
But, Sutherland says, there is also a need for fiscal sustainability. ‘This is especially important because governments often resort to borrowing money in the international markets to support their crisis response. But borrowing without fiscal sustainability in mind may lead to debt distress and other undesirable fiscal outcomes.’
Distribution and control
Case studies of Colombia, the Seychelles and Mongolia added to the lessons PEFA could draw from its review. The three countries diverged in some elements of their crisis response, but they also shared certain features. These included efficient distributions of funds and a reliance on robust internal controls.
Efficient distribution is built on ‘basic cash management procedures and having clear, strong rules that clarified how countries could go about dispersing cash,’ says Sutherland. Internal controls help maintain the integrity of financial management. ‘This is absolutely crucial to help maintain or minimise the misuse of funds during the crisis,’ he adds.
Weaknesses
That chimes with another finding of PEFA’s when it looked at PFM more broadly: external audit by supreme audit bodies is one of the weakest performing areas. Alex Metcalfe, ACCA’s global head of public sector, highlights the issue as one to watch.
‘External scrutiny is very often under-resourced and, for many, their independence is in question too. For me this is such an important facet of both delivering public services and having the right oversight of the financial management system.’
‘Those who did not have budget processes in place struggled to keep track of spending’
Another area of weakness is the management of asset and liabilities, an area Metcalfe argues is often overlooked as finance managers focus on cashflow and spending. And there is good reason.
According to Metcalfe, a firesale of assets might look like an attractive short-term option, but could undermine a state’s fiscal position. Likewise, pushing out repayments on liabilities into the future might seem like a relief but could also result in additional interest rate charges
Metcalfe says assets and liabilities were important during the Covid response and will remain a priority. ‘In the end, the kind of fiscal firepower to respond to crises comes down to not just the money coming in and out but the overall position that you have in terms of public sector net worth.’
Improvements needed
Though PEFA’s review reveals the sheer scale of spending during the crisis, and may have highlighted weaknesses and strengths, Sutherland says overall it underlines the important of strong PFM.
The report reveals, he says, that for the majority of countries there was scope for improving their financial management systems. Those countries that did not have strong, robust PFM systems in place before Covid did not then develop them during the crisis.
Countries that had solid reporting mechanisms, in-year reporting, and the ability to follow up and report on resources as they were used, fared better in terms of being able to report on how Covid-related financing was appropriated and used, Sutherland observes.
‘Those who did not have those measures and budget processes in place struggled to keep track of Covid-19 spending.’
